Gold: The Enemy of CurrenciesLast week saw gold prices rise despite deflationary fears.Taking a look at the chart below we can see the gold price in US dollars has traded in a narrow range since May. This is despite the dollar declining for much of that time, see chart further below. (Click to enlarge)

We noted last week that we were going to keep an eye on the Fed Open Market Committee meeting in case they decided to increase the money supply even further. But they didn’t.

The Federal Open Market Committee failed to commit to anything… they didn’t say they would resort to more quantitative easing… they didn’t say they wouldn’t. Instead they’re pausing for breath.

The inflation, deflation debate continues As the deflationary, inflationary debate continues to be waged between financial heavyweights we stand on the side and watch. We’ve always believed the act of quantitative easing is inflationary; It inflates the money supply. We also think the governments only way out, of this huge debt burden it has imposed upon itself, is to inflate the debt. If you make the value of your debt less you have less to pay back, but it’s a juggling act. Inflate too much and you run the risk of hyperinflation, something that, the Germans will tell you, doesn’t bode well for an economy.

US Trade Deficit What’s the next move for gold? We have to wait and see what happens around the globe to find that out. Certainly, its course is no longer dictated by the movement of the dollar as much as it once was. Will this relationship resurface? Probably, but when it does it will most likely be when the dollar makes a significant move, triggering panic in the dollar or gold.

Which is more likely – a panic or strength in the dollar? Last week Bloomberg reported that the US trade deficit has swelled to an incredible figure:“The U.S. trade deficit widened by $7.9 billion in June, the most since record-keeping began in 1992, to $49.9 billion, a report from the Commerce Department showed. Exports posted the biggest decline since April 2009.

“Investors should prepare for “major structural changes” as the global economy shifts to slower growth, Mohamed A. El- Erian, chief executive officer at Pacific Investment Management Co. said yesterday in a radio interview on “Bloomberg Surveillance” with Tom Keene.”

This news reverberated around the markets.

A quick look at the VIX index shows us that fear has reentered the market… again. At the far right of the graph you can see the index rises sharply which signifies a growing fear of volatility in the markets.

With a stuttering economy and growing tension between the US and China, the trade balance could play a huge role in a dollar devaluation. But in order for the dollar to drop further people will have to lose faith in its safe haven status. Which means an alternative currency will need to take its place. The problem with this scenario is that there aren’t too many other candidates for the role as a global reserve currency. And whilst that is the case gold can continue to take center stage.

Will things get better? In the grand scheme of things the debt, from Dubai to Greece has just been shuffled around. The run up in the stock markets suggests stability but investors are cautious. They’re wondering if this is another ‘suckers rally’. And they’re right to be cautious. If you play with fire… well you know that old saying. In other words it doesn’t end well.

Can things get better? That depends on what governments do.

More money printing can only add to the attractiveness of gold. But gold is the enemy of currencies. As Alan Greenspan once noted, to control the dollar you have to control the gold price.

The fight for governments around the world is one which is traded in blows against the gold price. And should they win the price of gold may very well settle back to lower prices until supported by a strong level of jewelry demand. But this is dependent on currencies being kept under control. Both the US and the UK have not ruled out further money printing, and with each new wave of money the original currency is worth less and less.

It all sounds too reactionary to us. There doesn’t seem to be a grand plan. Maybe there cannot be as the markets lead themselves. But whatever the case, none of the actions by those in power have any finiteness about them. There’s no plan and no control.